Breaking it Down: Parent Companies, Holding Companies, and Subsidiaries
A lot of investing-related language can be straight-up confusing. This can make investing seem scary and much more complex than it actually is. We’d rather investing be approachable, so we’re breaking down some of the common investing terms you might see or hear.
What do Taco Bell, KFC, and Pizza Hut have in common? They’re all “subsidiaries” of the same parent company, Yum! Brands. But what does that mean for your ownership—and what’s the difference between a parent company and a holding company? Let’s break it down.
What’s a subsidiary company?
A subsidiary is a company that’s at least 50% owned by one other party. In other words, another, larger corporation—be it a parent company or a holding company, which we’ll get to in a second)—owns at least half of the company’s stock.
With more than half of a subsidiary’s shares of stock, a parent or holding company also has more than half of the votes when it comes to shareholder meetings and proxy voting. That gives the owner of all that stock what’s called a “controlling interest,” because they have a substantial amount of influence on company decisions and actions.
When a subsidiary is 100% owned by one other company, it’s called a “wholly-owned subsidiary.”
What’s a parent company?
Companies that have a controlling interest in other companies—while also having their own day-to-day business operations—are known as “parent companies.”
Two common ways a company can become a “parent”:
- By acquiring—purchasing—another company.
- By creating another, smaller company (aka subsidiary)—to handle specific parts of business operations, so the main company can stay focused on the primary activities, for instance.
Parent companies can come in all shapes and sizes. Some are huge conglomerates, like General Electric, which has a subsidiary that focuses just on Power and another that focuses just on Security, for instance.
Others might be “horizontally-integrated”—meaning that the parent company and its subsidiaries all operate at the same level in the same or similar industry. Gap, Inc., which owns Gap, Banana Republic, Old Navy, and Athleta, is an example.
There are also “vertically-integrated” parent companies, like Apple, which own several companies involved in a supply or product chain.
What’s a holding company?
Like parent companies, holding companies have a controlling interest in other companies. Unlike parent companies, holding companies don’t have their own day-to-day business operations and exist solely to own—or hold—their subsidiaries. Holding companies don’t produce their own good or services, and they might own a variety of subsidiaries in a variety of different industries.
One holding company you might interact with regularly (even if you don’t know it) is Berkshire Hathaway. You might recognize a few of their many subsidiaries. Berkshire Hathaway has a controlling interest in Dairy Queen, Geico, Fruit of the Loom, Brooks, and Duracell, among many others.
Note: Brand trademarks belong to their owners. Mention of any specific stock or holdings is for illustrative purposes only and not an investment recommendation.